DEFINITION of 'Free Reserves'

A measurement of a bank's reserves that is equal to the difference between borrowed reserves and excess reserves. This is the amount which the bank has available to lend to clients. A bank is required by federal law to hold a specific amount of reserves at any given time. The excess reserves are calculated by subtracting the required reserves from the total reserves it holds.

BREAKING DOWN 'Free Reserves'

The Federal Reserve can alter the available credit held by commercial banks by either selling or purchasing securities in the open market or by increasing the amount of required reserves to be held by commercial banks. In addition, banks can increase their reserves by borrowing directly from the Fed.

RELATED TERMS
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RELATED FAQS
  1. What do banks do to control the bank reserve?

    Understand what the Federal Reserve does in order to expand or contract the economy. Learn what depository institutions can ... Read Answer >>
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    Learn how bank reserve requirements are determined and how bank reserves affect shareholders through improved bank stability ... Read Answer >>
  3. Why do commercial banks borrow from the Federal Reserve?

    Learn how commercial banks borrow from the Federal Reserve to meet minimum reserve requirements, and discover the pros and ... Read Answer >>
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